Anti-administrativism returns to the SEC’s doorstep, by James Fallows Tierney
*This is the sixth post in a series on Alex Platt’s new Article, Is Administrative Summary Judgment Unlawful? For earlier posts in the series, click here.
Alex Platt takes aim at the Securities and Exchange Commission’s Rule of Practice 250, which authorizes “summary disposition” on the papers in administrative enforcement proceedings where there is no genuine dispute of material fact. Platt says this practice is illegal, because the APA requires oral hearings in all sanctions-eligible enforcement proceedings.
This is a worthwhile target, and there are good reasons to be concerned about the fairness and procedural regularity of administrative adjudication. I used to work on the staff of the SEC’s Office of the General Counsel, where I handled some summary disposition matters.
Platt’s thoughtful argument contributes to the literature on the institutional design of public enforcement of the securities laws. But he ultimately fails to persuade, for three reasons. First, his textual argument overlooks the strongest textual support for summary disposition. Second, he doesn’t address what his argument would mean practically for the typical SEC summary-disposition case. Finally, his position would give rise to incentives for strategic default.
The weak statutory case against administrative summary judgment
Platt contends that Section 7(c) of the APA creates an “absolute right” (p. 265) to a hearing in a sanctions-eligible formal adjudication. That rests on reading together what he calls Sentences Five and Six. Kent Barnett has persuasively and meticulously detailed some problems with that textual argument, and I will not rehash it here.
Instead, I’ll pick up on a loose thread in Barnett’s analysis: the notion that other language in § 7(c) permits administrative summary disposition. Platt’s textual argument rises and falls with the paragraph he devotes to “Sentence Two” (p. 263-64).
Platt contends that Section 7(c)’s “Sentence Two” can’t authorize summary disposition. Sentence Two permits agencies to receive “[a]ny oral or documentary evidence … , but the agency as a matter of policy shall provide for the exclusion of irrelevant, immaterial, or unduly repetitious evidence.” Sentence Two thus authorizes agency policies like the SEC’s Rule of Practice 250 that exclude “immaterial … evidence” by providing for a hearing on the papers when the only evidence sought to be adduced doesn’t dispute any material facts.
Platt is wrong that this has no independent effect and is limited by Sentence Six, “which prohibits agencies from entirely skipping over oral hearings” except in certain situations (p. 263). In saying we shouldn’t read Sentence Six as a nullity, he then sets up Sentence Two as a strawman, suggesting that it can’t permit exclusion of “all oral evidence” (p. 263). But that is not what Sentence Two does. It directs agencies to adopt policies excluding certain “immaterial” oral evidence in all circumstances. This includes Rule of Practice 250, which provide for the exclusion of evidence that doesn’t raise any genuine dispute of “material” fact. In contrast, it is Sentence Six that permits agencies in certain circumstances to limit presentation of “all oral evidence”—that is, the remaining evidence that Sentence Two doesn’t require agencies to exclude.
Sentence Two is about exclusion of immaterial evidence, and thus also contemplates summary procedure with respect to that evidence. Section 559 grants the SEC and other agencies “the authority necessary to comply” with the APA “through the issuance of rules and otherwise.” As Barnett pointed out, this includes acting through Rules like 250 to exclude that immaterial evidence through summary disposition procedures.
As the D.C. Circuit held in Siegel v. Atomic Energy Comm’n, 400 F.2d 778 (1968), Sentence Two authorizes an agency to limit cross-examination about immaterial facts at an in-person oral evidentiary hearing notwithstanding Sentence Five. As a textual matter under the APA, the court said, Sentence Two trumped Sentence Five; an agency “need not hear evidence which it is otherwise entitled to regard as outside the perimeter of the issues.” Siegel was a licensing case, but that had no bearing on the holding.
It’s ironic that Platt invokes the canon against superfluity, because his own argument would render Sentence Two a nullity. He contends (p. 266 n.88) that “the plain text” of Sentence Six prohibits “eliminating oral hearings in all [SEC] cases” as well as in a subset of cases, such as Rule 250 or another summary disposition procedure where there is no genuine dispute over the material facts. Thus only in Sentence Six cases did Congress want this oral evidence to be excluded. But what work does that leave for Sentence Two when an agency exercises its Sentence Six authority?
If Platt’s reading were correct, it’d be curious that Congress didn’t write Sentence Two as it did Six. Instead Sentence Six would have to snake back through the provision, perhaps selectively—an unnatural reading of the statute. It’d also call into question the validity of case law such as Steadman v. SEC, 450 U.S. 91 (1981), which applied Sentence Three to a sanctions-eligible SEC adjudication.
Case law likewise favors grounding administrative summary judgment in Sentence Two. There’s a lurking question here: just when did the courts of appeals authorize summary disposition, and why? Platt carefully traces the case law back as far as he can find, and claims courts never fully grappled with his textual claim. He attributes the rise of summary disposition to free-wheeling procedural adventurism by judges and academics (pp. 308-09; Unstacking, pp. 443-44, 469). Administrative summary judgment, he says, reflects a “Consensus Justification” favoring adjudicative efficiency. And so the cases addressing this procedure reflect this policy, not the APA’s text.
Perhaps when the only tool you have is a hammer, everything looks like a nail. Many decisions embraced this procedure for policy reasons. But that is no reason to suppose there wasn’t a textually grounded basis.
For instance, Platt’s article never engages Persian Gulf Freight Conf. v. Fed. Maritime Comm’n, 375 F.2d 335 (D.C. Cir. 1967), which rejected the same APA argument on textual grounds. The court of appeals held that Sentence Five doesn’t entitle a respondent to an oral evidentiary hearing even when there were no material facts in dispute. While Sentence Five “speaks in terms of a requirement of trial-type evidentiary proceeding,” the court said, “such an evidentiary hearing has not necessarily been required where the question involved has been essentially one of law.” Quoting Producers Livestock Mktg. Ass’n v. United States, 241 F.2d 192 (10th Cir. 1957), the D.C. Circuit noted that it was “fundamental to the law that the submission of evidence is not required to characterize a ‘full hearing’ where such evidence is immaterial.” The APA reflects that “fundamental” proposition in Sentence Two.
When Platt suggests that the “Consensus Justification” case law is unmoored from the APA’s text, these casesare the elusive specter with which he is shadowboxing. In these APA cases, the courts held that § 7(c) allows agencies to resolve adjudications on the papers when there is no genuine dispute of material fact. Platt might be excused for not uncovering these older cases, as they remain obscure and thinly cited today.
But they still tend to refute Platt’s claim that the Consensus Justification—rather than the APA’s text—is the source for administrative summary judgment. These cases predated by several years the Gellhorn and Robinson (1971) article that Platt attributes (Unstacking, pp. 442-43) as the beginning of the Consensus Justification. By that time, courts and scholars were aware of this statutory interpretation. Indeed, although Platt rejects it as “policy-driven” (id.), the court in Citizens for Allegan County, Inc. v. Federal Power Comm’n, 414 F.2d 1125 (D.C. Cir. 1969), looked to the APA cases in embracing summary disposition on supposedly policy-based grounds. It’d be unsurprising that in these years administrative lawyers were developing normative reasons to adopt streamlined procedures that courts had recently said the APA allowed.
Future archival research might reveal how parties litigated the APA textual issue in these early years, in which case Platt’s Consensus Justification hypothesis may yet be proven “right” as a historical matter. But as a matter of statutory interpretation, Platt takes a position that ultimately fails to persuade—claiming the mantle of “textualism” but offering a surprisingly atextual rejection of the statutory language.
What to do with immaterial evidence in the cases that are brought
Platt also doesn’t address his argument’s implications for the typical SEC case involving undisputed facts. He acknowledges (p. 254-55) that 91% of cases the SEC resolves on summary disposition are in “follow-on” proceedings against registered firms and people, or in “delinquent filing” proceedings under Section 12(j). These cases share a common theme: the triggering event for initiating the enforcement proceeding is typically a nearly unassailable fact, such as another adjudicator’s finding of liability or a registrant’s failure to file periodic reports as required.
Consider the SEC’s recent opinion in Allan Michael Roth, which is typical of the follow-on cases in the SEC’s enforcement-docket pipeline. As the SEC explained, applicable law lets it “give preclusive effect in [an administrative proceeding] to the factual findings and legal conclusions of the underlying conviction.” And the record giving rise to Roth’s predicate state securities-law conviction provided an adequate basis for the SEC to find that Roth’s misconduct met several of the statutory requirements to impose sanctions in a follow-on proceeding. (Disclosure: I worked on the Roth case before leaving government.)
That left the SEC to apply its multi-factor Steadman test to decide whether the undisputed factual record submitted by the parties could support a finding that sanctions were in the public interest. Those factors are egregiousness, isolated or recurrent misconduct, degree of scienter, sincerity of assurances against recidivism, recognition of wrongfulness of conduct, and likelihood that occupation will present opportunities for future violations. (Similarly, in 12(j) cases, even where it’s indisputable that the registrant has missed its periodic filings, it remains an open question whether sanctions are in the public interest.) As Platt notes (p. 315), the Steadman factors might be those “that an in-person hearing would be helpful to elucidate,” as they “require individualized credibility assessments and investigations into facts beyond those required to establish the underlying violation.”
That’s an optimistic view of what a hearing would reveal in most cases. But it’s a poor match with how the procedure works in the cases making up the bulk of the summary-disposition docket. The hearing would be an empty formality in cases like Roth, in which a respondent appeared in the proceeding but did not respond to the Division’s motion for summary disposition. (It would be even more useless in cases in which the respondent defaults, which I discuss below.) In these cases, there are no assurances against recidivism or recognition of wrongfulness of conduct—and thus no credibility to assess. All the SEC is left with is the evidence offered by the Division of Enforcement.
So what would Platt have the SEC do in these cases? One theme in Platt’s broader work is the lack of congruity between procedural regularity and ruinous stakes in SEC adjudications. We might justifiably worry about these things when the SEC resolves proceedings, and imposes sanctions, like industry bars, based solely on undisputed evidence on the papers. Without adversarial testing, can we be confident that the public interest supports the agency’s sanctions determination?
But the policy-based arguments at the core of Platt’s objection to administrative summary judgment run headlong into Sentence Two’s mandate that agencies limit immaterial evidence. If taken seriously, Platt’s argument would suggest that the SEC couldn’t limit the presentation of oral evidence at all. Does Sentence Five really endow a follow-on respondent with an absolute right to present oral evidence about facts that they are legally estopped from contesting? (Of course, if a respondent raised genuine disputes of material fact under Steadman, then summary disposition would be inappropriate on those issues.) Perhaps this is what the APA contemplates, as Platt says—but only if you squint and ignore Sentence Two.
On the flip side, Platt identifies an implication with which I wholeheartedly agree: these procedures may let the SEC shift enforcement priorities toward cases that are “more amenable to a cheap and easy resolution without the expense of a full hearing or trial” (p. 312). There is some evidence for this low-hanging-fruit hypothesis. As Platt notes (p. 252 n.61), during the time he studies the SEC had stayed most administrative proceedings pending the Supreme Court’s resolution in Lucia v. SEC of constitutional challenges to the manner in which the ALJs had been appointed to office. When the SEC lifted the stay of administrative proceedings after Lucia, it instituted a long backlog of follow-on and 12(j) proceedings, setting these before the Commission itself rather than before the ALJs. (The ALJs were somewhat busy implementing Lucia’s remedial instructions.) And many recent opinions involved summary disposition. This might be objectionable if done to “rack up cheap and easy wins” for congressional overseers (p. 313), especially if at the expense of pursuing complex and perhaps more worthwhile cases.
Platt speculates that this may result in an undesirable “change in the composition” of the SEC’s cases (p. 314). But it may also reflect endogenous change in forum choice. Xin Zheng (2020) models SEC forum choice between federal court and administrative proceedings partly in terms of generating congressional support and reducing adjudication costs. In a world in which Platt is wrong on his APA claim, it might be preferable to have the SEC bring more complex cases in court—and to leave the administrative forum for relatively easier cases in which there are no genuine disputes of material fact. The winds are already blowing that way.
Waiver, forfeiture, and the problem of strategic defaults
Finally, Platt does not account for respondent default, a perennial problem in SEC administrative proceedings. He acknowledges that summary disposition often follows the respondent’s default by failing to appear or to contest the proceeding (p. 253 n.65). This is true for most litigated 12(j) revocation proceedings and follow-on proceedings. Yet he only discusses default in objecting to the SEC’s authority under Rule 155(a)(2) to trigger a default in connection with a motion for summary disposition—a trigger that the SEC I think has not used. Platt’s article otherwise suppose that default isn’t a problem. What does that imply for how to handle these cases?
Defaults typically occur when the person hasn’t responded to the SEC’s order instituting proceedings. There are sometimes practical reasons for this, such as an incarcerated respondent who might lack incentive or resources to contest a proceeding to kick them out of the industry. Likewise, defunct companies whose penny stocks trade inactively in over-the-counter markets have little incentive to contest a 12(j) proceeding to revoke their public-company registration. But the Commission takes notice and service issues in these cases seriously, so truly inadvertent defaults are likely to be rare.
Platt doesn’t suggest that the supposed unlawfulness of ASJ excuses a persons’ failure to appear or engage with the proceedings. But his proposal raises serious questions about how the agency could respond once a person fails to respond to a proceeding. It likewise raises concerns about strategic default.
Suppose the APA were to create an absolute right to an oral hearing, waivable only at the respondent’s option (p. 260-61, n. 72). The SEC would have to hold an oral evidentiary hearing at which—we can assume—a respondent would not appear and would not offer evidence. The respondent might then evade sanctions by declining to voluntarily waive rights to an oral hearing, not participating in the proceeding, and tying the government’s hands. Such strategic default would be undesirable as a policy matter.
Platt’s waiver argument alternatively suggests that the right to an oral hearing isn’t absolute. Perhaps a person who strategically defaulted would forfeit the right to an oral hearing. But Platt offers no rationale for drawing the line at waiver or forfeiture, and not extending to forfeiture for failure to produce material evidence requiring an oral hearing. If the claim is that a respondent must have the opportunity for an oral hearing, there’s no real difference between a hearing at which a respondent doesn’t appear, and forgoing the hearing because the respondent hasn’t put forward any oral evidence that would be material. With respect to their forfeiture by conduct, those two respondents are in the same position.
Platt’s article is an interesting and provocative contribution to the literature on SEC enforcement. He underscores the importance of APA compliance when agencies engage in procedural innovation. And in offering a brief against a controversial practice, Platt executes well and raises a serious challenge.
Yet it is a challenge I suspect is doomed to fail if put to the test. Here’s what I’d tell the SEC if I were still on staff: take Platt’s article seriously, because he identifies an important area of administrative procedure for which the legal authority is mushy and under-theorized. Dig into the archives for the legal memoranda that supported Rule 250, which you may need to beef up if it becomes a live issue. But don’t take Platt’s article so seriously as to reconsider or withdraw Rule 250. Any legal challenge ultimately would (and should) fail because of Sentence Two, and because of the undesirable consequences that would follow if Platt’s proposal were to be adopted.
James Tierney is assistant professor of law, University of Nebraska College of Law.